I’ve said it before – and I’ll say it again: When laws pass, stocks soar.
It’s our “motto” around here.
When states and nations legalize marijuana, pot stocks soar. It makes perfect sense.
But there’s an important addendum to make here, and it’s one I’d add for any industry I can think of: If the taxes are too high, the profit potential can get bogged down.
Let me explain…
There’s One Wet Blanket Dampening Revenue Potential
We all remember back in November 2016, when voters in California, Maine, Massachusetts, and Nevada held successful “adult recreational use” cannabis referendums.
Nevada got started first, with recreational retail stores opening in July 2017. Then California opened up recreational sales on Jan. 1, 2018. As of August, 2018, Massachusetts and Maine are still working to get their recreational programs off the ground.
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Chalk it up to the “first-mover advantage” I love when it comes to investing, but that first-mover status is now paying off for Nevada.
Dispensaries have seen sales soar past their expectations; at one point, demand swamped available supply. Silver State tax collectors are hauling in truckloads of revenue as well.
By the time the Nevada receipts are added up, taxable sales of cannabis from July 2017 to June 2018 are expected to top $500 million.
The total tax windfall is about $70 million, some 25% higher than the Nevada’s Taxation Department was expecting. About $25 million of that impressive haul will be a boon to local schools.
“We are viewed by many others outside Nevada as essentially being the ‘gold standard,'” Nevada Taxation Department Director William Anderson told the Associated Press. “It’s an often-used term, but it’s appropriate here.”
I wholeheartedly agree. In fact, Nevada is a regional leader in cannabis.
You see, fueling Nevada’s success – a “kicker” if you will – is its low tax rate and comparatively light regulatory burden. Especially compared to its neighbor California.
Growers in Nevada pay a 15% tax on their wholesale products, while retail customers pay an extra 10% tax – in total, that’s a tax of 25%.
By contrast, just across the state line, in California, excise, cultivation, and local and county taxes can result in cannabis consumers spending $0.45 in taxes for every $1 they spend on their marijuana, according to the number crunchers at Fitch.
You read that right: Californians must fork over nearly double the tax paid by neighboring Nevada tokers.
These astronomical rates have not only driven some cannabis consumers straight back into the arms of the black market, but they’ve cut into companies’ revenue and the state’s tax receipts.
The Numbers Tell the Tale – but a Happy Ending Looks Likely
During the first quarter of 2018, California tax officials reported $60.9 million in tax revenue from legal cannabis.
That’s barely a third of the windfall officials had been expecting.
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Now, a slow start for California was pretty much a foregone conclusion, considering both Colorado and Washington had similar hiccups out of the gate.
What’s more, state officials anticipate they’ll be back on track to receive $185 million in excise taxes in fiscal 2018 and then $630 million in fiscal 2019, the first full fiscal year of legalization.
Greg Shoenfeld, vice president of operations at BDS Analytics, says the state expects more firms will start getting their licenses through the year. As a result, he says, California will start seeing accelerated growth and revenue.
California legislators are also working to lower cannabis taxes. Assembly Bill 3157 would suspend the cultivation tax until June 1, 2021, and lower California’s excise rate from 15% to 11% for about three years.
The bottom line is that things seem to be moving in a positive direction, and they could be picking up speed, too.
And the upside for doing so is tremendous; Arcview expects California to generate more than $7.7 billion in legal sales by 2021.
Meanwhile, in Alaska, where voters legalized recreational cannabis in 2014, tax receipts added up to $11 million for the fiscal year ending in June.
Now, $11 million sounds modest, especially compared with the relatively large take Nevada and, eventually, California will enjoy. But you have to remember that, with just 739,000 or so residents, Alaska’s only the 48th most populous state in the Union.
And that $11 million figure represents an astounding 547% leap from $1.7 million the year prior.
And it could get even better:
“I don’t believe the market has saturated, and we haven’t seen exactly what capacity the state is going to operate in as far as cultivation and retail stores and the other facilities,” Kelly Mazzei, a tax official with the Alaska Department of Revenue, told NBC.
That’s the lucrative beauty of the situation pot stock investors are currently facing.
Nine states (as well as Washington, D.C.) have legalized recreational cannabis use, and 30 states have legalized some form of medical marijuana.
Plus, over a dozen more could come online by the end of this election year.
Nevertheless, even in places where cannabis is already legal, the profit potential for the best cannabis firms has yet to hit its full stride.
Note: Michael makes sure every single paid-up subscriber to his Nova-X Report investment research gets a free copy of his model portfolio packed with more than 30 of his favorite pot stocks. It’s called The Roadmap to Marijuana Millions, and, again, it’s free when you sign up. Click here to learn how to get it…
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